Economics: Demand Elasticity

Hi James,

Guess who? :) I am not sure if you can help me with this one but let me know if you can. Wednesday February 26th is deadline.

600 words

The board of directors at AutoEdge is actively discussing several options to address flagging revenue. One option continues to surface during each board meeting; that is, relocating the manufacturing operation back to the United States. Longtime Chief Financial Officer, Ingrid Adams, leads the group that is in favor of this option.

Ingrid Adams approaches you in the company break room.

"Hello," she says. "I'm glad I saw you."

"Hi," you say. "What can I do for you?"

"I have a question about economics," she says. "I think you can help me explain something to some shareholders on the board."

"Economics! My favorite subject," you say. "What's your question?"

"If AutoEdge decided to increase its prices and return to the United States," she says, "how would this action affect consumer demand? I want to know your opinion about elasticity."

"Sure," you say. "So you want to know if the elasticity for auto parts is considered to be relatively inelastic, relatively elastic, unitary elastic, perfectly elastic, or perfectly inelastic. Right?"

"Exactly," she says.

"I have an opinion," you say. "Do you want to talk about it now, or do you want something in writing?"

"Something in writing would be best," she says. "Would you explain your opinion so that I can respond to questions from other members of the board, too?"

"I'd be glad to," you say. "I'll put something together this afternoon and get it to you before I leave today. Is that soon enough?"

"Perfect," she says. "Thanks for your help."

Scenario:

This course uses the CTU Professional Learning Model™ (CTU PLM) to teach students with hands-on, industry-related, problem-solving experiences that model the professional environment and encourage achievements that lead to student and employer success. The CTU PLM is founded on the idea that students learn best by working on real-world, professional projects related to their chosen career fields. By working this way, students develop the expertise to apply conceptual knowledge to get effective results. Through professional learning, students experience the complexity of real-world problems and learn to select an appropriate approach to a problem that has more than one solution. This method of learning is called Problem-Based Learning (PBL). PBL assumes that you will master content while solving a meaningful problem in each assignment.
Throughout the course, you will work with a scenario in which some basic, background information is provided about a company. (This information could apply to any company that provides products or services of this sort in general.) You have a role in the scenario; that is, you are part of the story. The dialogue in each assignment presents the problem that must be solved. It is up to you to respond to the problem and submit a deliverable that will be graded.

Refer to the following scenario as you progress through the PBL process.
Problem-Based Learning (PBL) Scenario: AutoEdge
AutoEdge is a leading national automotive supply company located in Detroit, Michigan. Founded by Jonathan McAlister in 1976, the company specializes in engines and transmission parts and has been supplying products to the three largest U.S.-based automakers for over 30 years. AutoEdge's name is known by customers and leaders in the automotive industry for quality, dependability, and reliable products. In fact, despite the extra cost that is added to the automobiles, consumers appreciate the AutoEdge brand name and often make purchases because of it.

In 2005, AutoEdge's board of directors decided that the company needed to make some drastic changes because of the high cost of labor, rigid American regulations, and increased competition from other engine and transmission part suppliers. Their solution was to gradually close all manufacturing operations in Detroit and begin outsourcing to a well-known factory in South Korea. The board reasoned that this change would allow the company to compete with the growing industry, meet the automotive manufacturing demands, and increase company profits. Some board members were skeptical about the move, however, because AutoEdge had built a reputation for high-quality, detailed craftsmanship, and they feared that transitioning the manufacturing operations overseas would cause quality to diminish.

For the next 5 years, this strategy proved successful. The company showed signs of financial growth and company profit.

However, in 2010, the company was found guilty of supplying products that failed quality tests. As a result, millions of automobiles had to be recalled. The recall was highly publicized, and the issue of poor quality products impacted negatively on American automotive companies. AutoEdge's $51 per-share stock has fallen to $4 per share, and brand acceptance has come under scrutiny among even its most loyal customers. Although some economists blame these negative effects on the products, others believe that it had to do with the termination of AutoEdge's Chief Executive Officer, Fred McFadden.

Lester Scholl, Chairman of the Board of Directors, has called an emergency meeting to discuss AutoEdge's short-term and long-term strategies. Among other things, they need to discuss the possibility of continuing production overseas or returning it to the United States. Lester and others on the board are well-known for being financially conservative and risk-averse. Because the American economy is experiencing high unemployment, low interest rates, low GDP, and low inflation, it might be sensible to make the change. To some extent, they believe that these macroeconomic factors can be used to their advantage. They realize the immediate challenges such as the brand damage, the growing competition, and the financial challenges the company is facing require immediate action. A new strategy must be formulated quickly to save the company from bankruptcy.

You have been hired by AutoEdge's board of directors as a research analyst. Primarily, your job is to list and describe some of the legal, cultural, financial, and economic factors that AutoEdge needs to consider when deciding to either stay in South Korea or return to the United States. Because Fred McFadden was recently terminated, you will work directly with the board until a new CEO is named.